Markups of Chinese firms: Product choice and export discount

In the last two decades, many trade economists studied international trade at the firm level. This stream of literature found that exporters tend to be different from other firms. In particular, some trade economists have found that exporters have higher markups than firms that do not export, which seems to be consistent with the finding that exporters tend to be more efficient.

In this work, we study the markups of firms from China. We use production data to recover the markups of firms, which requires consistent estimation of the production function. We use the proxy approach for the estimation of the production function, which solves the problem of the endogeneity problem caused by the unobservable productivity.

Our findings show that the markups of Chinese firms grew progressively around the period when joined the WTO (1998-2007). Time periods, industry classification, and most observable firm-level characteristics are significantly correlated with markups, but they explain little of the variation in markups across firms. It turns out that unobservable firm characteristics explain about 50 percent of the variations in markups across firms.

Contrary to the findings in the literature, we find that the markups of exporters in China are significantly lower than other firms in China. The result is both economically and statistically significant, and robust to controlling of various factors. Since the export discount is invariant over a wide range of export intensity, we surmise that the export discount is unlikely to be caused by different markups (i.e., price discrimination) on the domestic and the foreign markets. We compared many characteristics of exporters and non-exporters and found that the only plausible explanation for export discount is that exporters are producing low-markup products.